Remember how in my first post I told you that living within your means refers to not only easily paying your regular expenses, but also putting some money aside every month? This is where we’re going to talk about setting yourself up with a financial cushion to provide you with security and a sense of control.
If you read articles about basic financial literacy, they all emphasize having 6-12 months of expenses available in cash as an emergency fund.
I can almost hear you laughing as you’re reading that. You’re thinking that that’s not even remotely possible. You’ve just started a job and barely have a positive balance in the bank.
First you need to understand the reason it’s at the top of the list. Let’s say you’ve been out of school for a year. You’re living paycheck to paycheck, just barely paying the rent and the electric bill, and one day you discover your car needs work and it will cost you $500. If you don’t have emergency funds to cover the expense, you put it on your credit card and all of a sudden you’re paying 18% interest and you have no plan to be able to pay it off. What happens the next time you have an unexpected bill? You have no other way to pay it, so that amount gets charged to your credit card as well, and soon your credit card debt is snowballing out of control.
If, instead, you’ve prioritized starting an emergency fund, you’ve been putting $100 into a savings account every month and you have $1,200 saved by now, a year out of school. You get the bill for the car repair and you pull the money to pay it out of your emergency fund. It still sucks, but you’re not kept up at night worrying about where the money is going to come from and praying that something else isn’t going to come up.
In my second example above, the one where you planned ahead and had the money available, you didn’t have 6 months of expenses saved. You had $1,200. You’re not going to have 6 months of expenses saved right away – that’s not realistic. What is realistic is to put aside $50 or $100 or $200 a month. Baby steps.
Once you save for a few months and see the balance growing, you’ll start to feel safe. You’re in control of your finances. You can see how you’ll be okay if something happens to your car or your pet or your health.
“True individual freedom cannot exist without economic security and independence.” – Franklin D. Roosevelt